Before delving into the meat of this post, a heads up: there will be some math-related concepts discussed. If you’re good at math, congratulations — you may be visiting this page because you’ve concluded your boss has incorrectly figured your hourly, bonus and overtime pay. If you’re not good at math, some of the calculations discussed in this post may be a little confusing. But take heart—you don’t have to be Einstein to suspect your employer of creative or shady accounting.

A Court Ruling Changes the Way Some Wages are Calculated

In defense of payroll accountants, there are times when calculating an hourly employee’s wages at the end of the work week can be deceptively difficult. This is particularly true when bonuses and overtime pay are involved and questions remain unclear as how to calculate the employee’s regular rate of pay. If an employee isn’t careful in double checking company arithmetic, it can be easy for the paycheck to come up short. And when checks come up short over a long period of time, the amount of back pay can add up.

This article discusses a recent state Supreme Court ruling, which examined differing guidelines (federal and state) regarding the calculation of hourly, bonus and overtime pay.

Happily, the California Supreme Court weighed in on this topic and issued a ruling slightly favoring non-exempt hourly employees. The court’s decision may even entitle some workers to back pay.

Alvarado v. Dart Container Corporation

The California Supreme Court ruled on this case on March 5, 2018. The case was filed by an hourly wage employee named Hector Alvarado, who worked in a factory producing food service products. A full-time employee, Alvarado, and other workers were offered a flat-sum $15 ”attendance” bonus (in addition to their hourly rate and overtime rate) as an incentive to work Saturday or Sunday shifts. The bonus was given when employees worked a full shift on Saturday or Sunday and was given regardless of whether the employee worked in excess of the normal work shift.

Two Different Formulas, One Preferred by the Company, The Other by Employees

The company had one calculation preference, Alvarado had another. The difference between the two calculations came down to whether or not the bonus was applied to all hours worked (overtime and regular), or only to non-overtime hours. The court explained the situation as follows:

“The attendance bonus must be factored into an employee’s regular rate of pay so that the employee’s overtime pay rate (generally, 1.5 times the regular rate of pay) reflects all the forms of regular compensation that the employee earned.”

The company preferred the following formula for calculating the employee base rate of pay:

The company would multiply the number of overtime hours the employee worked in the pay period by the employee’s normal hourly rate.

The employer would add the total hourly pay for non-overtime work as well as the non-hourly attendance bonus. (This calculation results in a figure the company considers to be the base rate of pay).

The Employer would then multiply the regular rate of pay by the total number of overtime hours, and then divide the amount in half. (This results in the overtime premium).

Employer would add base hourly pay to the overtime premium.

Alvarado, preferred a different calculation. His method involved the following:

Calculating overtime compensation in relation to the hourly wages.

Calculating the overtime compensation in relation to the bonus’s per hour rate, then multiplying that value by 1.5 and adding the number of overtime hours worked.

Combining the overtime amounts to obtain the total overtime compensation.

Alvarado’s calculation was slightly more favorable to workers than the company calculation.

How the Court Ruled

When arguing its case in front of the court, Dart Corporation maintained the court should look to a precedent-setting federal case which stated:

“Where a bonus payment is considered a part of the regular rate at which an employee is employed, it must be included in computing his regular hourly rate of pay and overtime compensation.”

Alvarado argued that a state case, relying on the California Division of Labor Standards Enforcement (DLSE) should guide the court’s opinion. The DLSE method factored “a flat sum bonus into overtime compensation.”

The Supreme Court, ultimately ruled in favor of Alvarado, and deemed the DLSE method of factoring the flat sum into overtime compensation to be appropriate. The court ruling was applied retroactively, which means employers could be on the hook for back pay.

Confused? Contact an Employment Attorney

If you’ve been confused by the calculations and legalese thrown around in this post, don’t despair. Even employment attorneys must focus intently while reading supreme court decisions to keep from going cross eyed. It’s important that you pay attention to your instincts, particularly if you have concerns about how your employer figures your rate of pay. If your employer has paid you hourly, overtime and bonus pay in the past, it could be worth your effort to discuss your case with a qualified attorney and find out if you might be eligible for back pay.

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